Author Info

Jeremy Glaser: For Morningstar I'm Jeremy Glaser. It's Portfolio Makeover Week on Morningstar.com, where our director of personal finance, Christine Benz, takes five real-life portfolios and gives them an overhaul. She's joining me today to talk about how to do your own portfolio makeover.

Christine, thanks for joining me.

Christine Benz: Jeremy, it's great to be here.

Glaser: So, let's look at some of the steps for doing an overhaul of your portfolio, getting the pieces together. The first really is just getting all of your ducks in a row and understanding what it is that you own.

Benz: That’s right. Do some data gathering. For a lot of us we've got our information stored in various places. You might have online accounts set up with various financial providers. You may be receiving paper statements from others. You want to take stock of all of your most recent information. Also round up Social Security data, get a profile on the Social Security's website, if you don't already have one. If you are eligible for a pension, find whatever current information is available regarding your pension. Start by doing some data gathering, bring all those pieces together before you get started so you are not hunting and pecking around as you are going through the process of doing the makeover.

Glaser: The next step is thinking about where you are in terms of your goals, assessing your progress toward those goals. What's the best way to do that?

Benz: I think you want to think of this as sort of a wellness check. Assuming I have one or two big-picture financial goals--for a lot of people that would be a retirement savings program as well as some sort of a college savings program--then you just want to see how you are progressing on your road to those goals. If you are still in accumulation mode, you sometimes hear that 15% of salary is a good starting point in terms of determining whether you are saving enough. I also like to refer people to Fidelity's benchmarks that it has for how much you should have amassed at various life stages.

You can go on Fidelity's website and find these benchmarks, but I think they are really helpful. At age 35 for example Fidelity recommends that people have set aside 2 times worth of their salary, at age 55, 7 times, and then by the time you are getting ready to retire, their recommendation is that you should have 10 times worth of salary set aside. Those are some benchmarks that you can look at if you are in accumulation mode, trying to determine the viability of your savings rate and how much you've been able to save.

If you are getting close to retirement, there I think you actually want to start thinking about well, is a withdrawal rate that I might need from this portfolio in fact sustainable. We've written a lot about this topic over the past several years. The 4% guideline, while not perfect, I think is a reasonable starting point. See if 4% of your portfolio combined with other certain sources of income that you might have, like Social Security, is enough to provide you with an adequate standard of living in retirement. Those are just some kind of ways to see if you are in the right ballpark in terms of the overall strength and viability of your plan.

Glaser: After making that assessment, the next step is to use a tool like Portfolio X-Ray really to see where all of your assets are.

Benz: That's right. The key thing you want to check up on is your asset allocation relative to your targets. A lot of people, especially early accumulators, really don't know where to start in terms of setting asset allocation targets. I often recommend target date funds as a way to kind of benchmark, am I in the right ballpark. You could also look to Morningstar's Lifetime Allocation Indexes for another check on whether your asset allocation program makes sense. If you are someone who is getting close to retirement and you are thinking about using the bucket strategy for structuring your portfolio, you can do your required living expenses from the portfolio and use that to kind of asset-allocate your portfolio. I have got a lot of model bucket portfolios on the website that people can look at, when kind of looking at whether their current asset allocation squares with their anticipated spending demands from their portfolios.

Glaser: It's also important to make sure you don’t have any unexpected big sector bets or unexpected bets.

Benz: That's another thing that you can get with our X-Ray functionality on Morningstar.com. You can see how your portfolio is arrayed across the U.S. equity style box. You can see how much you have in value, blend, and growth and from small to large, and just see whether you have any big inadvertent bets in your portfolio. For people who have been letting things ride over the past couple of years, certainly we've seen growth really dominate at the expense of value. If they haven't topped up their value exposure recently they may want to do that, unless they want, in fact, to have a big bet on growth. Also check up on big individual stock weightings--and this can commonly arise when someone has company stock in their portfolio--but just check, use our stock intersection tool to see whether you are overextending yourself in terms of betting heavily on a couple of stocks.

Glaser: Those steps could really help you make decisions about individual securities in your portfolios, but you also think it’s a good time to think about streamlining all of those portfolios as well, maybe reducing the number of accounts you have.

Benz: Absolutely, and this is something I try to do when I work on these portfolio makeovers, is to try to identify opportunities to bundle things together. A common example, one I frequently see, is where someone might have a few rollover IRAs from former employers or maybe 401(k)s that are still hanging out with former employers. I look across the accounts to see if there are opportunities to merge things together, and that can be beneficial from a couple of standpoints. One is that you may qualify for breakpoints that would give you access to lower-cost share classes than would be available if you had less in assets at a given firm. Another big reason to do this is just to simply give yourself fewer moving parts to oversee on an ongoing basis.

Glaser: Finally, the last step is to think about any risk factors and what your plan is to mitigate those.

Benz: I think you want to spend some time thinking about, are there any things that are hanging out there in my plan that are not addressed in any way. One thing I often talk to portfolio makeover subjects about especially, if they are in their 50s or above, is what is your plan for long-term care needs, if they should arise. What are your plans for covering those costs, which as we've discussed in the past can be quite large in some cases. We talk through things like that. Frequently people have children that they want to make sure are cared for, particularly children with special needs. Just think through what are the things in my plan that worry me apart from my investments that I want to make sure to address in my financial plan. Think through these things; they won't necessarily be part of your portfolio makeover, but nonetheless they can form the basis for a to-do list of things that you should be working on in the years ahead.